Oh my . . . the Obama Administration has called the last play of the game, the offense claps as it breaks the huddle, the team is set to bang the financial markets' reform ball over the goal line. But Team GOP is digging in for the last-ditch stand. Suddenly, the Democratic running back goes wide -- the SEC amazingly announces a Friday Complaint against Goldman Sachs. Is that a misdirection or the real thing? Next, the tight end goes in motion and sets as a wide receiver -- Dick Fuld is grilled by Congress. Then the quarterback drops back into a shotgun formation -- the President will speak on Wall Street this Thursday.
The Republican middle linebacker barks out his new coverage, as the defense re-sets. Now, all that remains is for the snap, the run or pass, and the spot where the nose of the football comes to rest.
Will this end with a touchdown, a stop short of the goal line, or a lousy fumble?
My problem is that I don't think it will ultimately matter whether someone scores or not. Both teams are dead last in their division. This is the final game of the season. They are both ten games out of first and didn't qualify for the Wild Card. And while die-hard fans and purists say that you have to play the game out, the fact is that the outcome is of little consequence.
Pass all the new laws that you want. Amend as many old laws as you wish. It simply will not matter. This is not about the written words. This is about a culture of corruption and incompetence that has permeated our society and Wall Street. Until such time as we infuse new blood into the system and force out the familiar cronies and their sycophants, nothing will change beyond the whitewash and plaster.
Take this recent example:
On April 14, 2010, the United States Securities and Exchange Commission (SEC) issued a clearly well-intentioned press release. First off, the SEC is to be commended for promoting the release as an "Investor Warning." Truly, that is the case. The headline for the release states:
Investor Warning Relating to Eric V. Bartoli, Enrico Orlandini, and DT Analysis
a/k/a and Dow Theory Analysis SAC
The Investor Warning alerts the public to the fact that the SEC received credible information suggesting that an individual named Eric Bartoli, who was previously sued by the SEC for securities fraud, may currently be located in Peru and engaged in securities solicitations of investors, using the alias Enrico Orlandini. Further, Bartoli/Orlandini is operating through a company named DT Analysis a/k/a Dow Theory Analysis SAC.
Why should investors be wary of the parties cited in the Investor Alert? Well, the SEC's Investor Warning provides ample clues:
Now, let's drill down a bit and see what's behind those above citations.
In its complaint, the SEC alleged the ongoing fraudulent sale of unregistered securities, specifically Cyprus Fund shares, and the misappropriation of investor funds by principals of Cyprus Fund, including Bartoli. The SEC noted that on September 3, 1999, the district court entered a preliminary injunction against the defendants, including Bartoli, and extended the asset freeze to the conclusion of the case. On September 29, 2000, a Final Judgment of Permanent Injunction and Other Relief was entered against Bartoli, enjoining him from future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933; Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and Sections 206(1) and 206(2) of the Advisers Act. Bartoli defaulted and did not respond or reply to the charges. Accordingly, the SEC ordered Bartoli barred from association with any investment adviser.
The SEC's Complaint in this matter alleged that from at least 1993 through August 27, 1999, the date the SEC's emergency action was filed, Bartoli and the other principals of Cyprus Funds, James L. Binge, Douglas R. Shisler, and Peter J. Esposito, raised over $80 million from investors in the United States and Latin America through the fraudulent sale of mutual fund shares and "certificates of deposit" issued by Cyprus Funds. Contrary to representations that Cyprus Funds invested in "blue chip" stocks and bonds, in reality, Bartoli, Binge, Shisler and Esposito misappropriated millions of dollars from Cyprus Fund, diverted monies to their other businesses and, in a Ponzi-scheme fashion, to pay interest to Cyprus Funds investors.
On September 15, 2000, the Honorable Ursula Ungaro-Benages of the United States District Court for the Southern District of Florida entered an Order holding Defendant Bartoli in civil contempt for failing to comply with a previous Court Order commanding that he deliver his passport to the Clerk of the Court. Judge Ungaro-Benages held that Bartoli's refusal to comply with the prior Court Order was "willful and flagrant" and sanctioned Bartoli by striking his pleadings and entering a default judgment against him. Judge Ungaro-Benages also issued a Writ of Bodily Attachment providing for Bartoli's immediate arrest. Bartoli was arrested on September 21, 2000, and released later that day when he surrendered his passport to United States Magistrate Judge Muirhead of the United States District Court for the District of New Hampshire.
In addition, on December 14, 2005, the SEC filed a Notice of Voluntary Dismissal With Prejudice of its claims for disgorgement and civil penalties against Binge, who is deceased, and Shisler and Esposito, who were both criminally convicted on charges arising from the same facts as those alleged in the SEC's complaint, were incarcerated and have been ordered to pay restitution of $8.7 million and $6 million, respectively. The SEC also dismissed its monetary claims against the corporate Defendants, Cyprus Funds and Lasco, and the Relief Defendants, which are defunct entities under the control of the court appointed receiver for those entities, Michael I. Goldberg (the "Receiver"). Since the commencement of this case, the Receiver has made three distributions to investors totaling approximately $9.6 million.
On January 20, 2006, the Judge Ungaro-Benages entered a Final Judgment Setting Disgorgement, Prejudgment Interest and a Civil Penalty as to Bartoli ("Final Judgment"). The Final Judgment orders Bartoli to pay disgorgement and prejudgment interest in the amounts of $19,700,000 and $29,244,388, respectively, and further orders him to pay a civil penalty in the amount of $110,000. Also see, http://www.sec.gov/litigation/litreleases/lr19595.htm (SEC Litigation Release No. 19595 / March 7, 2006)
Okay, so, here's the amazing part of the story. You know where it says above that Bartoli was arrested on Septemeber 21, 2000 and released later that day when he surrendered his passport? Well, guess what? Since his arrest, he apparently traveled through a number of states, Europe and Latin America. In fact, Bartoli has been living in Peru since late 2000, and the authorities have likely been on notice of that fact since 2001. It is reported that Bartoli is now a Peruvian citizen and presents himself as an investment adviser, financial advisor, and real estate developer.
All of which explains why the SEC issued an Investor Alert about this guy. Still, the SEC didn't get it quite right. Not by a long shot.
A WARNING!!! (Well, sort of, you know, perhaps)
After sounding the alarms, here is what the SEC states in its Investor Warning:
Investors who are solicited by these named persons or entities should take steps to satisfy themselves that the offer is legitimate and complies with the law. Investors are encouraged to review the SEC publication "Ask Questions" and other SEC publications located at http://www.sec.gov/investor.shtml before making any investment. Some questions investors may consider asking include:
- Is this investment product registered with the SEC and my state securities agency?
- Where can I get more information about this investment? Can I get the latest reports filed by the company with the SEC: a prospectus or offering circular, or the latest annual report and financial statements?
- Are you registered with our state securities regulator? Have you ever been disciplined by the SEC, a state regulator, or other organization (such as the Financial Industry Regulatory Authority (FINRA) or one of the stock exchanges)?
LIMITATIONS OF THIS WARNING
The staff of the Division of Enforcement, Office of International Affairs, and Office of Investor Education and Advocacy are providing this Investor Warning as a service to investors. This Investor Warning should not be construed as indication that any determination has been made regarding whether the person or entities identified in this Investor Warning are engaged in wrongdoing or violation of law, or as indication of whether the SEC is investigating, or will investigate the persons or conduct identified in this Investor Warning. Additionally, investors should be aware that the names identified on this Investor Warning are not necessarily exhaustive.
The Q&A -- Are you kidding?
The first problem I have with the Investor Warning is the suggestion -- implied as it may be -- that if investors would just ask these con artists the right questions, then you wouldn't be scammed. Umm, hello...but, like, don't you good folks at the SEC understand that world-class con artists defraud their prey and do so with incredible artistry. Is the SEC really proposing that the best approach to protecting the public is to have them ask questions of the scamster?
How about this, for a thought. While we're on the subject of asking questions, let me remind the SEC of these findings in the SEC Office of Investigations' Report of Investigation: Investigation of Failure of the SEC to Uncover Bernard Madoff's Ponzi Scheme (Case No. OIG-509, August 31, 2009) (Public Version) http://www.sec.gov/news/studies/2009/oig-509.pdf
[T]he OIG investigation did find, however, that the SEC received more than ample information in the form of detailed and substantive complaints over the years to warrant a thorough and comprehensive examination and/or investigation of Bernard Madoff and BMIS for operating a Ponzi scheme, and that despite three examinations and two investigations being conducted, a thorough and competent investigation or examination was never performed. The OIG found that between June 1992 and December 2008 when Madoff confessed, the SEC received six substantive complaints that raised significant red flags concerning Madoff's hedge fund operations and should have led to questions about whether Madoff was actually engaged in trading. Finally, the SEC was also aware of two articles regarding Madoff's investment operations that appeared in reputable publications in 2001 and questioned Madoff's unusually consistent returns.
. . .
[W]e also found that investors who may have been uncertain about whether to invest with Madoff were reassured by the fact that the SEC had investigated and/or examined Madoff, or entities that did business with Madoff, and found no evidence of fraud. Moreover, we found that Madoff proactively informed potential investors that the SEC had examined his operations. When potential investors expressed hesitation about investing with Madoff, he cited the prior SEC examinations to establish credibility and allay suspicions or investor doubts that may have arisen while due diligence was being conducted. Thus, the fact the SEC had conducted examinations and investigations and did not detect the fraud, lent credibility to Madoff's operations and had the effect of encouraging additional individuals and entities to invest with him.
Would I Lie to You?
So, "no" I don't think it's a good idea to simply suggest that investors ask the crook trying to sell them garbage a number of questions. At best, such an approach will likely yield the following dialog:
VICTIM: Is this investment product registered with the SEC and my state securities agency?
CON ARTIST: Of course! Here, this is a copy of the official registration approval by the SEC. Here are several offical approvals from a number of states. You don't need to contact the SEC or the states, you can retain those copies for your records.
VICTIM: Where can I get more information about this investment? Can I get the latest reports filed by the company with the SEC: a prospectus or offering circular, or the latest annual report and financial statements?
CON ARTIST: Leave your address with my secretary and we'll get everything out to you. I can assure you, however, that all reports have been timely filed. I can give you a copy of this checklist that we maintain to confirm that.
VICTIM: Are you registered with our state securities regulator? Have you ever been disciplined by the SEC, a state regulator, or other organization (such as the Financial Industry Regulatory Authority (FINRA) or one of the stock exchanges)?
CON ARTIST: Yes we are registered with the regulators and I have a clean record.
What about the copies of registrations and reports that the con artist will provide? You have a computer these days, you can do wonders when it comes to fabricating official-looking documents. What about the regulatory histories of these bad guys? Hey, you think it's easy to get a straight answer from a regulator, you go online and try to figure out the interface, or, even better, see if you get a human being on the phone to answer your questions. I appreciate the SEC's rah-rah, self-help, roll-up-you-own-sleeves approach here, but I hope that the SEC realizes that the bad guys will make up names of companies and individuals with no reported histories -- I mean, c'mon, give them at least that much credit.
A Better Idea
As with so many bureacracies, the SEC is better at finger pointing than at solving problems. What's missing with the SEC's approach is a sense of responsibility -- that maybe the best way for regulators to prevent fraud is to have Staff who take the calls from potential victims and actually run down the issues and personally respond. Imagine if a consumer could actually call the SEC and ask:
"Hello, I was just solicited by Reggie Repp from Fly-By-Night Broker Dealers to invest in a company called R.U. Kidding. Can you provide me with a report about Mr. Repp and the two entities?"
Imagine if the SEC then emailed that report or actually called by the investor and said,
"Mr. Repp was barred from the securities industry in 2001 by the SEC, the NASD, and the states of California and Washington. Fly-By-Night is not registered with the SEC or FINRA and is not a bona fide broker-dealer in the United States. We have no registration statement for any public company called R.U. Kidding."
The very next step the SEC Staff should take would be to issue an inter-agency bulletin about Repp and the two companies. That bulletin should initiate a watch list for those names and initiate a meaningful investigation that would either confirm the bona fides of the parties and remove their names from the watch list, or, generate Investor Warnings from all participating regulators.
Frankly, I suspect that such a hands-on regulatory protocol would be far more effective than -- well, you know, than what was cited as a failure in the SEC Report of Investigation about Madoff that is referenced above. Whatever the old ways, they just didn't work. And please don't start in with how this could bankrupt the regulators. I would have no problem charging the public a modest fee for the service -- after all, if someone is going to be saved from investing five, six, or seven figures with a con artist, a $5 or $20 service charge would be a worthwhile expense.
Diluting the Impact
Finally, what the hell is with that "LIMITATIONS OF THIS WARNING" language. Is the SEC channeling Charlie Chan? "This Investor Warning should not be construed as indication that any . . . " That should be as "an indication" or as "indicative." If the error were made only once, I would not mention it, but here it is again: ".. or as indication of whether the SEC is investigating. . ."
Of course, maybe I'm missing something here but why is the SEC even limiting its Investor Warning as it pertains to Bartoli and/or Orlandini? Why does the Investor Warning admonish that:
This Investor Warning should not be construed as indication that any determination has been made regarding whether the person or entities identified in this Investor Warning are engaged in wrongdoing or violation of law, or as indication of whether the SEC is investigating, or will investigate the persons or conduct identified in this Investor Warning . . .
I know that I'm just another over-priced lawyer, but if the above referenced SEC and U. S. District Court decisions are not supposed to be construed as determinations that Bartoli/Orlandini is a con artist, then what the hell should a reasonable person infer from those rulings? The guy defaulted, was barred, and is now a fugitive, but, hey, don't construe that as an indication that he engaged in any wrongdoing or violation of the law? Then there is my personal favorite -- that despite all those ominous indications, the SEC does not want you to construe that it may be presently investigating those named, or that it may investigate such parties in the future. Oh no, perish the thought!
Sitting in the stands as yet another spectator, I acknowledge that I am bored. I have become a curmudgeon when it comes to the "politics of regulation." In my defense, I might add that I believe that I am a somewhat youthful looking pickle-puss. My cynicism, sarcasm, malevolence and misanthropy are all provoked by the daily absurdities that politicians and bureaucrats inflict upon us -- my problem is that I take these idiots and their idiocies personally. Changing the securities laws without changing the regulatory structure (and its tired crew of outdated regulators) is doomed to failure. You see folks, old ways die hard. Inept regulators and their absurd regulatory policies will hang on with a death grip.
The SEC's case against Goldman Sachs has lots of holes in it.
RRBDLaw.com: New FINRA Cases Analyzed by Bill Singer
Regulatory lawyer Bill Singer has analyzed and posted the latest crop of FINRA disciplinary cases.